What do real estate investors need to look at when buying properties with existing tenants?
Buying properties with existing tenants can be very beneficial. Whether you’re looking at a wholesale deal or long-term hold rental, inherited tenants can mean instant cash flow, lower risk, and more net profit. They can even make the property more attractive for other investors, financiers, and end buyers.
Of course, this is only true if the tenants are good, performing renters. Or you can at least use the situation to get a great deal, which you can then add value to. The last thing you want is to walk into a bad situation that will cost you far more than you bargained for and that could turn into a legal nightmare. So, what should you be looking at when evaluating properties with existing tenants?
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3 Factors to Examine When Taking Over a Property with Tenants
1. Tenant Performance
Don’t just look at local rental asking prices or leases on the property. You need to know whether the renters are actually paying and whether you can expect them to pay on time. If not, are there good late fees in the lease that can add to the bottom line? Are any tenants in default or the eviction process? Will that be complete before you close?
Talking directly with the tenants to get their version is a smart move, too. Watch out for discrepancies between what the seller is saying about the status of the rent and deposits and what the renter says. Also, beware of special deals. Are there any discounts for repairs or work that the tenant is doing?
As a part of your due diligence, you may want to conduct some basic background checks on the seller and the current tenants. Are there any glaring criminal issues or complaints about management that haven’t been disclosed? Know who and what you are working with.
If the numbers or scenario aren’t what you hoped, you can use this as leverage for negotiating a better price or terms. If the seller stays firm, then be willing to walk away.
2. Property Condition
You may not personally need to walk through every unit, but someone on your team needs to. They need to document the current condition thoroughly. You want to know if there are any big pending repairs or dangerous situations that need to be remedied before or as soon as you take over. You want to know if some renters are destroying the unit and if others are going above and beyond to take care of your asset. All these repair costs need to be factored into your underwriting of the deal—because that is capital coming out of your pocket. If you were unaware of some of the repairs up front, you can use this as leverage when negotiating with the seller.
3. The Numbers
In scenarios when a tenant is in place, running your numbers conservatively can be beneficial. This means you should assume the worst, which is how I generally purchase properties. I assume the seller is selling the property because of the troubled tenant. I factor that into my calculations, assuming the tenant is going to move out or that I will have to evict them and then spend additional capital to get the property rent-ready. From experience, these situations only work out 30% of the time, so I have grown accustomed to accounting for the worst case scenario.
Existing tenants can be good or bad. Whatever the situation, there is a price point and terms that can turn this situation into a good opportunity. If the tenants are at fault for property damage or non-performance, check the lease expiry dates. You may be able to get them out before closing or within 30 days. For others, you may want to negotiate an early exit.
What has your experience with existing tenants been?
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